Low Income Housing Tax Credit

Hope Manor (Chicago)

The Low Income Housing Tax Credit (LIHTC, Housing Credit) is a dollar-for-dollar federal tax credit for affordable housing investments. It was created under the Tax Reform Act of 1986 and gives incentives for the utilization of private equity in the development of affordable housing aimed at low-income Americans. The program is administered at the state level by state housing finance agencies (i.e. IHDA) with each state getting a fixed allocation of credits based on its population. IHDA evaluates applications against our “Qualified Allocation Plan” (QAP).

LIHTC accounts for the majority (approximately 90%) of all affordable rental housing created in the United States today, and is the most successful affordable housing tool in Illinois. The tax credits are more attractive than tax deductions as the credits provide a dollar-for-dollar reduction in a taxpayer’s federal income tax, whereas a tax deduction only provides a reduction in taxable income. Almost all investors in LIHTC projects are corporations.

The maximum rent that can be charged is based upon the Area Median Income (“AMI”) and is capped at 80% of AMI. Rents must be kept affordable for a 15-year initial “compliance period” and a subsequent 15-year “extended use period”.

LIHTC is awarded under two different methodologies. Under either methodology, a project’s “eligible basis” is determined (for an in-depth explanation of what constitutes eligible basis, please see the QAP). Projects for new construction or rehabilitation of an existing building, if not funded by tax-exempt bonds, can receive a maximum annual tax credit allocation based on a rate which is generally 9% of the project’s eligible basis (“9% credits”). IHDA awards 9% credits based on a competitive process via two allocation rounds per year.

Projects with at least 50% of the financing coming from tax-exempt bonds can receive a maximum annual tax credit allocation based on a rate which is generally 4% of the project’s eligible basis (“4% credits”). IHDA accepts applications for tax-exempt bond projects seeking 4% credits at any time. These credits are not awarded via a competitive application round and therefore the project need only satisfy the mandatory requirements under the QAP.

A developer proposes a project to IHDA, wins an allocation of tax credits, completes the project, certifies its cost, and rents-up the project to low-income tenants. Simultaneously, an investor makes a “capital contribution” to the project’s owner in exchange for being “allocated” the entity’s LIHTCs over a ten-year period (syndication).The program’s structure as part of the tax code ensures that private investors bear the financial burden if properties are not successful. This pay-for-performance accountability has driven private sector discipline to the LIHTC program, resulting in a foreclosure rate of less than 0.1%, far less than that of comparable market-rate properties. As a permanent part of the tax code, the LIHTC program necessitates public-private partnerships, and has leveraged more than $100 billion in private equity investment for the creation of affordable rental housing nationally.

The annual Qualified Allocation Plan (QAP) sets forth the criteria for evaluating all projects that apply for a tax credit allocation. The QAP takes effect upon the approval of the IHDA board and the governor.

The first step in applying for LIHTCs is to submit a Preliminary Project Assessment (PPA). The PPA addresses project concept, design, location and proposed tenant population. PPAs are either approved or denied by IHDA. Approval of a PPA does not guarantee an allocation of tax credits or any other IHDA resources.

Preliminary Project Assessments (PPA’s) and Low Income Housing Tax Credit (LIHTC), Applications are now accepted via the Multifamily Portal. PPA’s previously approved for the 2018 9% LIHTC Round are eligible to apply for 2019 LIHTC. IHDA is accepting PPA’s on a rolling basis and will close the portal for 2019 9% PPA’s on November 9, 2018. IHDA intends to inform sponsors of PPA status no later than December 21, 2018. 2019 9% LIHTC Applications will be due February 15, 2019.

IHDA is no longer accepting PPA requests under the 2016 and 2017 QAP. Previously approved PPA’s are valid for one year from the date of approval.

Any 4% applications with approved PPA’s may be submitted on a rolling basis until September 1, 2019.

The request form can be found in the Developer Resource Center section of the IHDA Website or at https://ppa.ihda.org. IHDA will endeavor to notify Sponsors within 45 days of the Authority’s receipt of the request for 4% PPA approval.

As is well known throughout the affordable housing industry, Congress recently created a new occupancy set-aside option known as “income averaging.” Instead of electing the 20/50 or 40/60 minimum set-aside, an owner may elect an income averaging set-aside. This allows a property to serve households up to 80% AMI, as long as at least 40% of the total units are rent and income restricted and the average income limit for all tax credit units in the project is at or below 60% AMI.

The Authority understands its stakeholders are excited to take advantage of this new option to better serve the needs of those seeking affordable housing. Given the nuances of this new set-aside option, the Authority is carefully reviewing applicable law and industry guidance with the goal of developing a policy around income averaging that will ensure the Authority can continue to administer the low-income housing tax credit (“LIHTC”) program in the most effective and efficient way possible.

As the Authority continues its analysis of this new set-aside option, the Authority wanted to provide some information about the parameters currently being considered. The information in this bulletin is not intended to be conclusive or exhaustive. The Authority’s final policy may or may not include the elements discussed below. In addition, if determined to be applicable, the Authority will take steps to amend the 2018-2019 Qualified Allocation Plan.

Please note, developments will be ineligible to select income averaging if: (i) the development received 9% LIHTC award from the Authority in 2018 (or earlier); or (ii) the development receives a 9% award from the Authority in 2019; or (iii) the development already has a recorded Extended Use Agreement (including resyndications); or (iv) the development already filed a Form 8609.

Developments seeking 4% LIHTC’s that desire to elect income averaging will be considered by the Authority on a case-by-case basis. Tax exempt bond developments will still need to meet all applicable bond-related compliance requirements.

Additionally, the Authority is in the process of updating the Affordable Rental Unit Survey (ARUS) to reflect all the allowable income levels under income averaging. Please click the link below for additional information.

Anticipated mandatory requirements for any development requesting to elect income averaging:

All units must be designated low income; the development may not contain unrestricted or market rate residential units.

Designated income/rent levels may only be set at 10% increments beginning at 20% of AMI. Allowable income/rent designation levels are 20%, 30%, 40%, 50%, 60%, or 80% of AMI. The Authority reserves the right to limit the number of AMI designations per property.

Anticipated supplemental application items for any development requesting to elect income averaging:

Written acknowledgement from the LIHTC equity investor that income averaging is compatible with requirements of other public and private funding sources.

Written acknowledgement from the property manager regarding the compliance implications and commitment to provide annual income averaging training to on-site property management.

Payment of an additional application fee to re-underwrite the development, if applicable.

Payment of an additional compliance fee to reflect increased monitoring requirements for developments that elect income averaging.

The status of all PPAs and applications for IHDA resources, as well as IHDA’s current portfolio, can be found via the fully searchable mapping tool below. Click on the map below to search the IHDA portfolio and pending projects.

TWITTER

Thinking of buying a home? The @GreaterSW is hosting a free #homebuyer education class on Saturday, March 23 from 9 am to 2 pm. Join them to learn more about the IHDA Mortgage Access and 1stHomeIllinois programs which can provide you as much as $10,000 in down payment assistance!

FACEBOOK

Are you thinking of buying a home? The Greater Southwest Development Corporation (GSDC) is hosting a free homebuyer education class on this Saturday, March 23 from 9:00 a.m. to 2:00 p.m. Join them as they will help explain the benefits of homeownership and provide information on building your credit, managing debt, and establishing savings. In addition, they will provide you with more information about the IHDA Mortgage Access and 1stHomeIllinois homebuyer programs which can provide you as much as $10,000 in down payment assistance and a competitive interest rate for a secure, 30-year fixed rate mortgage.

This homebuyer education class is FREE and location details are as follows: